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Exam 4: Completing the Accounting Cycle

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Question 31

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The Income Summary account is used to close the permanent accounts at the end of an accounting period.

A) True
B) False

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Question 32

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All of the following regarding the current ratio are true except:

A) Current ratio is calculated by dividing current assets by current liabilities.
B) Current ratio can reveal challenges in covering short-term obligations if it is less than 1.
C) Current ratio can affect a creditor's decision about whether to lend money to a company.
D) Current ratio does not affect a creditor's decision on whether to allow a company to buy on credit.
E) Current ratio helps to assess a company's ability to pay its debts in the near future.

F) C) and D)
G) B) and C)

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Question 33

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Tunica Company's fiscal year ends on September 30 of the current year. Tunica frequently has accrued revenues at the end of its fiscal year that are recorded for proper financial statement presentation. The company has determined through an evaluation of invoices and services rendered that $32,000 of services has been provided as of September 30, but not yet billed. The total contract to be billed for services when completed will be $60,000. Record the following entries: (a) Accrual of the revenues on September 30. (b) Receipt of payment from customers on October 9 for the services rendered, assuming that Tunica does not prepare reversing entries. (c) Assuming that Tunica prepares reversing entries, reverse the adjusting entry made on September 30. (d) Assuming that Tunica prepares reversing entries, receipt of the payment for the total contract amount on October 9.

If a company plans to continue business into the future, closing entries are not required.

Assets, liabilities, and equity accounts are not closed; these accounts are called:

Calculate the current ratio in each of the following separate cases and identify the company case with the strongest liquidity position. $\begin{array} { | l | l | l | } \hline & \text { Current Assets } & \text { Current Liabilities } \\\hline \text { Case 1 } & \$ 55,000 & \$ 30,000 \\\hline \text { Case 2 } & \$ 141,500 & \$ 85,000 \\\hline \text { Case 3 } & \$ 45,000 & \$ 59,000 \\\hline & & \\\hline & & \\\hline\end{array}$

On the work sheet, net income is entered in the Income Statement Credit column as well as the Balance Sheet or Statement of Owner's Equity Credit column.

Explain why temporary accounts are closed each period.

Reversing entries overcome the disadvantage of more complex entries to pay accrued liabilities from the previous accounting period.

Revenue and expense accounts are permanent (real) accounts and should not be closed at the end of the accounting period.

The following information is available for the Higgins Travel Agency. After closing entries are posted, what will be the balance in the C. Higgins, Capital account? $\begin{array}{llr} \text {Net Income } &\$42,500\\ \text { C. Higgins, Capital } &130,000\\ \text { C. Higgins, Withdrawals } &12,000\end{array}$

Which of the following accounts is a permanent (real) account?

The first step in the accounting cycle is to analyze transactions and events to prepare for journalizing.

Intangible assets are assets that are long-term, have physical form, and are used to produce or sell products and services.

Which of the following statements is incorrect?

A company had revenues of $75,000 and expenses of $62,000 for the accounting period. The owner withdrew $8,000 in cash during the same period. Which of the following entries could not be a closing entry?

Presented below are the year-end balances at December 31 of Becca's Dry Cleaning Service. (All accounts have normal balances.) $\begin{array}{ll}\text { Accounts receivable } & \$ 12,000 \\\text { Accounts payable } & 25,000 \\\text { Accumul ated depreciation-equipment } & 30,000 \\\text { Cash } & 42,000 \\\text { Depreciation expense-equipment } & 12,000 \\\text { Insurance expense } & 7,000\\\text { Equipment } & 125,000 \\\text { Service revenue } & 200,000 \\\text { Notes payable } & 65,000 \\\text { B. Stanton, Capital } & 17,000 \\\text { B. Stanton, Withdrawals } & 18,000 \\\text { Prepaid insurance } & 1,500\\\text { Salaries payable } & 4,000 \\\text { Salary expense } & 97,000 \\\text { Supplies } & 1,500 \\\text { Supplies expense } & 16,000 \\\text { Unearned service revenues } & 500 \\\text { Utilities expense } & 9,500 \end{array}$ (a) Prepare the necessary closing entries at December 31. (b) Prepare a post-closing trial balance at December 31.

Use the information in the adjusted trial balance presented below to calculate the current ratio for Taron Company: $\begin{array} { | l | r | r | } \hline \text { Account Title } & { \text { Dr. } } & \text { Cr. } \\\hline \text { Cash } & \$ 23,000 & \\\hline \text { Accounts receivable } & 16,000 & \\\hline \text { Prepaid insurance } & 6,600 & \\\hline \text { Equipm ent } & 100,000 & \\\hline \text { Accumulated Depreciation -Equipment } & & \$ 50,000 \\\hline \text { Land } & 95,000 & \\\hline \text { Accounts payable } & & 17,000 \\\hline \text { Interest payable } & & 2,400 \\\hline \text { Unearned revenue } & & 5,000 \\\hline \text { Long-term notes payable } & & 30,000 \\\hline \text { Z. Taron, Capital } && 136,200 \\\hline \text { Totals } & \$ 240,600 & \$ 240,600 \\\hline\end{array}$

The withdrawals account is normally closed by debiting it.

Reversing entries: